South Africa: The Danger Of Complacency In Light Of The Delay In The Carbon Tax

Executive Summary

The recent announcement of a postponement in the implementation
of the carbon tax should be understood against the relevant
national and international legal background and should not be taken
at face-value.

In addition to the postponement, the announcement indicates a
better defined, more rigorous and multi-layered set of carbon tax
obligations, the implementation of which will require industry to
develop a range of systems and expertise.

In addition to these carbon tax design elements,
government's potential to postpone implementation of the carbon
tax indefinitely is limited.

The combination of this complexity of design and the
time-squeeze on government means that there is a greater urgency
for industry to self-assess its carbon tax liability, the reporting
obligations that will be imposed and the strategic and other
measures that can be taken to manage and mitigate exposure to the
carbon tax.

Introduction

Minister Pravin Gordhan, in his 2014 Budget Speech to Parliament
on 26 February 2014, rather cryptically indicated that the
implementation of the proposed carbon tax, initially pegged for
January 2015, will be postponed by a year to 2016. Here is what the
Minister said in his speech: "Following public consultation,
the National Treasury and the Department of Environmental Affairs
have agreed that a package of measures is needed to address climate
change and to reduce emissions. This will include the proposed
carbon tax, environmental regulations, renewable energy projects
and other targeted support programmes. To allow for further
consultation, implementation of the carbon tax is postponed by a
year to 2016."

The context of this bald announcement delaying the
implementation of the tax is provided in the 2014 Budget
Review and the nuances that this context brings are essential
to understanding the implications of the postponement for business.
In particular, to hear only the headline that the carbon tax is
delayed without considering the reasons for and implications of the
delay is to ignore an important message from government about the
near-term consequences for the economy of climate change policy and
carbon pricing. This article seeks to interpret the message from
government.

Messaging around the carbon tax

There are two main aspects to the message, namely:

The outcome of the public participation process that Treasury
ran on the May 2013 Carbon Tax Policy Paper is that 94% of the 115
participants support the notion of pricing carbon in the South
African economy, while more than 50% of the respondents support the
carbon tax (as the means of pricing carbon).

Design of the carbon tax continues to evolve, including the
following:

Government intends to implement the carbon tax and reduce the
electricity levy at the same time, with the net tax burden being
low in the first five years of implementation, rising slowly
thereafter and more steeply after 10 years. That government intends
reducing the electricity levy commencing with the introduction of
the carbon tax provides a response to queries relating to rising
costs of electricity generation and the concern that the carbon tax
would, effectively, be a further levy on power generation
notwithstanding that the electricity levy can already be seen as a
tax on carbon.1 The Minister's statement in the 2014
Budget Speech will go some way to dealing with these concerns.

Using some of the revenue generated from the carbon tax to fund
the energy-efficiency tax incentive, which began operating on 1
November 2013. Application of a portion of carbon tax revenue to
funding the renewable energy allowance provided for in section 12L
of the Income Tax Act No. 58 of 1962 is confirmation of a similar
point made by the Minister in the 2013 Budget Speech and is a theme
that has carried through discussion of the carbon tax since then.
Utilisation of carbon tax revenue to realise an
environmental/sustainable development objective (soft ear-marking
of a portion of the carbon tax revenue) is an important concession
by Treasury given that the usual fiscal policy is to avoid
ear-marking of funds in the fiscus.

Using firms' carbon offsets to reduce their carbon tax
liability by between 5 and 10% of actual emissions, as outlined in
the soon-to-be-published carbon offsets policy paper, confirms
Treasury's understanding that the utilisation of carbon offsets
against a carbon tax liability can be a significant support to the
South African carbon market which is currently being affected by
temporary weakness in the international market.

Reporting and classifying of greenhouse gas emissions for tax
purposes will be aligned with mandatory emissions reporting to the
Department of Environmental Affairs
("DEA"). This inter alia
confirms the position of the carbon tax as a significant component
of national climate change policy – a role that was
articulated in the DEA's National Climate Change Response
Policy Paper (November 2011) and has been increasingly
clarified since.

Analysing the linkage between the carbon tax and national
climate change policy provides insight into the immediate
consequences, for emitting industries, of postponing the carbon
tax. Such consequences include a better defined, more rigorous and
multi-layered set of obligations, the implementation of which will
require industry to develop a range of systems and expertise. A
further consequence is that government's potential to postpone
implementation of the carbon tax indefinitely is limited. The
combination of this complexity of design and time-squeeze on
government means that there is a greater urgency for industry to
self-assess its carbon tax liability, the reporting obligations
that will be imposed and the strategic and other measures that can
be taken to manage and mitigate exposure to the carbon tax.

Over the near- to medium-term the DEA will require the
commencement of mandatory measurement, evaluation and reporting of
the greenhouse gas emissions of industries that emit in excess of
100 000 tonnes of carbon dioxide equivalent
("tCO2e")
or which use electricity the generation of which results in
emissions in excess of 100 000 tCO2e. The legislative
mechanism that the DEA will use is to declare greenhouse gas a
priority pollutant in terms of section 29 of the National
Environmental Management: Air Quality Act No. 39 of 2004
("NEMAQA"). Such declaration triggers
the legal requirement for the development of a Priority Pollutant
Management Plan which, when finalised, will be gazetted as a
regulation under NEMAQA and will impose an obligation upon emitters
of the priority pollutants to measure, evaluate and report on their
emissions of the priority pollutant. This is the abovementioned
DEA's "mandatory emissions reporting" that will link
to the carbon tax.

One can identify at least two drivers for the DEA's
legislating in this manner:

the requirement for integrated environmental management which
flows from the environmental right in the Bill of Rights into the
suite of environmental statutes that the DEA administers;
and,

the role that South Africa plays in the international climate
change negotiations.

In relation to the former, namely the requirement
for integrated environmental management: NEMAQA is
widely considered as essential to realising the environmental right
which is articulated in section 24 of the Constitution as the right
"to an environment that is not harmful to health or
well-being". NEMAQA section 2 provides for a direct link
between this Constitutional right and the objectives of NEMAQA
which include protecting and enhancing air quality, and giving
effect to the Constitutional right in order to "...enhance the
air quality of ambient air for the sake of securing an environment
that is not harmful to the health and well-being of people"
(NEMAQA, section 2(b)). The specific referencing of health
considerations in NEMAQA was much fought-over in the lengthy
Parliamentary and stakeholder participation processes (in the early
2000s) which led to NEMAQA's present formulation. South
Africa's activist green civil society was adamant that the
reference to health should be retained. Various organisations made
very robust representations in this regard when a near-final draft
of the Act was circulated by government and was found to be
deficient in this respect. Civil society's view has not altered
in the time since NEMAQA was promulgated and the need for the Act
to be used to protect air quality and health is a prominent part of
current submissions from civil society opposing Eskom's
application to delay the implementation of certain air quality
management measures. The DEA is acutely aware of the standards to
which civil society seeks to hold government and industry,
including standards relating to air quality, health and the
reduction in national greenhouse gas emissions. Delayed
implementation of long-anticipated obligations on emitting
industries to quantify and report on greenhouse gas emissions is
likely to receive adverse attention. The net effect is heightened
pressure on government, DEA and Treasury, to establish an
operational carbon tax linked to the DEA's mandatory emissions
reporting within the NEMAQA legal framework.

In relation to the latter, namely South Africa's
role in the international climate change
negotiations: South Africa presents itself as a
leader in the international climate change negotiations and as a
lynch-pin country that can bridge the divide between developing and
developed countries. The country Parties to the United Nations
Framework Convention on Climate Change
("UNFCCC") and the Kyoto Protocol have
set themselves until the end of 2015 to agree upon the form and
content of the international legal regime providing for the global
response to climate change from 2020. With some eighteen months
left in the negotiation process, various country Parties and
negotiating blocs have begun to manoeuvre for position at
the table. For example, the European Union
("EU") has recently announced that, in
future, access to the EU Emissions Trading Scheme
("ETS") as a market for carbon credits
generated, by developed countries, according to the rules of the
Kyoto Protocol will be restricted to 5% of the ETS total volume of
emissions and only to those developed countries that make
significant concessions in the climate negotiations. This is by
contrast to the former EU position which, until recently,
anticipated unlimited access to the EU ETS for carbon credits
generated in Least Developed Countries. It is worth mentioning that
an essential element of the negotiation-stance of developed
countries, including the EU, is that developing countries need to
make a greater contribution to the global response to climate
change. In this light, the EU's announcement can be understood
as the first salvo in a negotiation battle that will rage until the
Twenty-First Conference of the Parties to the UNFCCC
("COP21"), scheduled to be held in
Paris, France, in November 2015. In order for South Africa to
defend its perceived position as a developing country leader in the
negotiations, it will need to demonstrate that it is taking
domestic significant action to respond to climate change. The
carbon tax is among the country's most evident mitigation
greenhouse gas mitigation measures and it would strengthen our
negotiation position to be able to place a fully operational carbon
tax on the negotiation table as we progress towards COP21.

Conclusion

Minister Gordhan's announcement that the carbon tax is
postponed to 2016, while confirming the linkage between the
DEA's greenhouse measurement and reporting regime and the
carbon tax regime, does not amount to an easing of pressure on
industry to prepare for implementation of the carbon tax. Rather,
the apparent extra time must be considered in light of the
announcement's confirmation of greater complexity in the tax
regime (one that must operate between two government departments,
namely Treasury and the DEA) and the imperatives on government to
have an operational carbon tax system as a contribution to national
integrated environmental management and South Africa's prestige
and climate change negotiation position. Industry is encouraged to
consider this bigger picture and to investigate the actions
required as preparation for medium-term implementation of the
carbon tax.

Footnote

1. The electricity levy, introduced in the 2010 Budget
Speech as the "renewable energy levy", is a levy of R
0.035 per kilowatt hour of fossil fuel generated electricity levied
on electricity generation plants with a capacity exceeding five
megawatts. In reality, Eskom as the primary producer of fossil fuel
generated electricity passes the levy onto the consumer. Eskom has
also indicated that it would seek to do the same with its carbon
tax liability, which would result in consumers paying both the
electricity levy and the carbon tax - hence, the importance of this
clarification that the electricity levy would be reduced as the
carbon tax is introduced.

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